This is interesting. Jean-Louis Gassée, former head of Be Inc. and now a venture capitalist, has spotted what may be another prong of Google’s strategy; break the carriers’ term-contract system by driving the price of smartphones so far down that customers don’t need or want a carrier subsidy.
Here’s what he says:
The great news is Google wants to disintermediate the carriers. How do they do that? By working with the Android army of manufacturers and targeting the $89 price point. Once there, carrier subsidies are no longer needed, consumers are free to move from one carrier to another as they get a better deal, or as they buy a new gadget without having to beg for an ETF (Early Termination Fee) exemption.
I’m not sure why Gassée thinks $89 is a magic price point, and this paragraph appears in a post labeled Science Fiction: Nokia goes Android, but no matter. Qualitatively, Gassée is certainly on to something.
There has to be some price point below which subsidies become unnecessary and the term-contract system collapses. It may not be $89, but it’s probably bracketed by $50 and $100. Maybe Google thinks the handset manufacturers really can push handset prices that low if the hardware people don’t have to pay for smartphone OS development. It may be right; the underlying question is probably whether smartphones have any components that aren’t following a Moore’s Law cost curve.
(Until recently, I would have said “Aha! The display!”. But it turns out the price of LCDs was being held artificially high by collusion among major manufacturers; the ring got busted in early 2009, and lawsuits are continuing.)
Well before we reach the point at which the term-contract system collapses, the declining bill-of-materials cost on a smartphone will put a hard squeeze on the amount carriers can afford to spend on software development – yet another strike against carrier skins. This reinforces my conclusion that the time when crippling Android with customizations remains a viable strategy is limited. It may be over already.
Gassée emphasizes an important fact that I first wrote about nearly two years ago, around the time the G-1 first shipped. The drama with Apple is in many ways a distraction; Google’s medium-term strategic goal is to break the cell-carrier oligopoly – smash their profit margins and commoditize their function. Gassée doesn’t note that longer-term than that they’ll have to take on the fiber/cable oligopoly as well, but he is certainly not stupid enough to have missed this.
Gassée has spent a lot of time thinking about which way Nokia’s going to jump once it becomes apparent that its software strategy is a fragmented mess. Like Piper Jaffray (and now me) he sees a move to Android as a strong possibility, but he raises another possibility. What if Stephen Elop, the Microsoft alumnus they’ve tapped as CEO opts for Windows Phone 7?
I don’t think it will happen. It would combine all the present business disadvantages of Android with the disadvantages of a closed-source codebase controlled by someone else. Nokia’s engineers would scream bloody murder, and Nokia’s stockholders would probably tar and feather Elop and ride him out of Finland on a rail.
Still, the possibility can’t be completely ruled out. Large companies have certainly done more blatantly self-destructive things before. The smartphone wars have been aspiring to the condition of low comedy ever since Steve Jobs said “You’re holding it wrong!”; a mad fling between Nokia and Microsoft would take them straight to opéra bouffe.